It is a common mistake to think saving and investing are the same thing. Before we go ahead and say that they aren’t, it is important that we first understand why it is that we think they are the same thing.
Saving and investing, both include the process of putting aside a set amount of money from your income. That’s about where their similarities end. They both have different goals.
Saving is a goal focused focused activity. You set a savings target for yourself and you save towards it. Completion of that goal is marked by a transaction.
Investing is what you do with capital. It involves some risk and it anticipates a reward. Portions of your savings that you are willing to expose to risk, in return for a possibility of higher returns is your investment capital.
It is common for people to save for an investment, such as a downpayment on a house. You save to hit that goal and then you allocate it towards that investment.
Social media spaces like Linkedin and Twitter were rife with talk about how people’s stocks and crypto portfolios took a beating in the recent market turns. If history has taught us anything, it is that that is just what markets do. There are periods of exhilarating highs and soul crushing lows. Seasoned investors are well aware of this and they don’t depend on their investments for their purchase commitments.
When the market goes up and up, new investors who taste profits start planning their purchases based on the uptrend. You and I know at least one person who saved for something in the stock market. They ended up with lesser than how much they had saved when the markets turned.
In the long run, even modest investments outperform savings. But, like anything, they have their own use cases and it has to do with how much time you have and how much risk you can take.
Your needs, like paying for your children’s education, downpayment for you car, upgrading your electronics are things that are time bound. It makes most sense to save for these as you anticipate these transaction before a certain date as per your plan or need.
Uncertainties like a job loss or a large medical expense are things that can shake anybody’s core. It is important to have savings that you can access for such times. It is not wise to put the money that you have saved for something as important as education into your investments. You may get hit with a market crash and you will be forced to sell at a loss to recover your investment.
To sum up, if you can and don’t mind waiting for good returns, you invest.
If you need the money in the near future, you save.